BAD BREADTH

I’ve noted before that at intermediate turning points we will usually see breadth diverge from price.

The McClellan oscillator is now showing a large negative divergence and has moved back below 0 despite the market making new highs.

On a slightly more serious note we are also starting to see a divergence in the advance/decline line for the first time since the cyclical bull began.

The last time this happened the market was entering the final topping process of the last bull market.

I think that is probably the case here also as I believe we are already in a very large topping pattern.

As you can see on the chart the next four year cycle low is due sometime in 2012. 
Bernanke has massively increased the monetary response in the attempt to halt the secular bear, and we know how the last attempt to control the market turned out (we got the second worst recession since the Great Depression and the second worst bear market in history). I fully expect the next leg down in the secular bear to be even worse that the last one. Not only in the stock market, but also in the economy.
Greenspan already proved that you can’t meddle in the markets without eventually causing bad things to happen. Unfortunately Bernanke doesn’t seem capable of learning that lesson and has now made the same mistake again only on a much larger scale. I’m confident it will only lead to a much larger collapse in the end.
We will almost certainly dip below the `09 lows at the next 4 year cycle low, probably in nominal terms and certainly in inflation adjusted terms.
Once the impending intermediate degree correction runs it’s course we will get what I believe will be the last rally in this cyclical bull market. That rally may or may not make marginal new highs before rolling over into the next leg down in the ongoing secular bear market.
I expect by this time Bernanke’s insane monetary policy will have spiked inflation high enough to collapse the economy again and the global stock markets will begin the trip down into another devastating bear market.
In 2012 they won’t be calling it a Great Recession they will be labeling it by it’s true name; The next Great Depression!

315 thoughts on “BAD BREADTH

  1. Onlooker

    Yep, unfortunately I very much agree with your last sentence. There have been little tiny hints of acknowledgment, at the very margin of mainstream, that what we’re going through just may be depression-like.

    The full recognition will come over them in time. I just wonder if people, on the whole, will finally understand, and acknowledge, what terrible folly monetary policy has been over the last 25 yrs or so (at least).

  2. Revan

    Gary,

    I agree with your hunch of the future and believe there is a high probability of an outcome similar to what you outline in your blog.

    Nevertheless I must admit – with all the respect I have for you – that in my eyes you begin to damage your creditability with the typical error of overconfidence when you predict 2012 now.

    You obviously have a great understanding of the trends of the gold market and made some very good market calls during the last months – you deserve a lot of credit for that.

    But predicting the stock markets performance of 2012! with a tone of certainty seems to be typical overconfidence to me. And overconfidence always gets punished by the market – as you well know I am sure.

    Believe me, there is a large and extraordinary list of theoretical events that might happen during 2011, that will change the outlook completely – even without expecting a true black swan.

    Therefore I will still follow your short and mid term analysis with interest and respect – but will take the future one step after another.

    And thats my best advice I can give anyone here. Be prepared for the unexpected and unthinkable !

  3. n1tro

    unexpected and unthinkable….

    the masses are not expecting the stock market to crash and it is unthinkable that another great depression will occur given the government just adverted the last one….sooo…with that in mind, Gary’s predictions are pretty spot on.

  4. T.J. Rand

    Gary-

    You’re a ray of sunshine this morning!

    Need to make as much as possible in 2011/2012, and get some of it offshore against gov’t mandated treasury purchases and/or exorbitant taxes on ‘speculation’.

  5. Gary

    Ollie,
    Look at the 2000-2002 bear market and tell me if you think miners can resist a bear market in stocks.

    Or you could look at the Nov. 08 to March 09 period when the stock market was collasping into a final low and see what happened to mining stocks.

    Revan,
    I would be willing to bet a burrito that the stock market will be in severe trouble by the middle of 2012 πŸ™‚

  6. Wes

    Dick Arms is saying the Arms index (TRIN) is the most overbought ever. This is in almost 50 years.

    Since he invented the index, I’ll take this as a reliable signal.

  7. magazine st

    Gary,
    If it holds up today, we now have a swing in the dollar. Where is day 10 considered in the cycles timing band? Can a bottom be left or right translated or is that only relating to tops in failed cycles?

    Thanks

  8. Poly

    This market has been treading water for two straight weeks, all under very bullish news. Will there be anybody left to buy it if the news turns?

  9. Revan

    T.J. Rand,

    I live in Europe and believe me – the same thoughts as yours are thought here by many.

    Germany and Switzerland had a buying stampede for gold/silver coins in 2010 – driven not by institutionell but by private persons – the guy next door that is obviously more aware of the possible future as in other countries, where that stampede did not happen yet.

    So this leaves a serious question for your concept:

    What is a good “offshore” place to be in 2012 if it isnt US or Europe ? Switzerland it isnt – believe me.

    Dont tell me Bermudas, Luxembourg or some other mini-country like that. In a *great depression*, originating from the western heavyweights, they all get washed away – believe me. Look what happened in the twenties and dont underestimate the risk of political instability in this theoretical hideaways. Even condemnation is something you should have on your radar in these hideaways !

    Also physical gold under your pillow is not an option as it might get confiscated by the government.

    If you ask me and want to secure your wealth in a great depression, DONT leave the political stable US oder Europe with your wealth and invest instead in farmland, wood, physical silver and so forth. And stay in the US.

    Silver cant be that easily confiscated by government, as it has use in many important applications.

    Never underestatimate the political risks outside your homeland – you typically cant really grasp that from inside of your country.

  10. Redwine

    Since this is basically an epic global monetary event it seems inevitable that gold will make an historic comeback, monetarily speaking.

    This could mean massive regulatory and taxing of gold mining companies and possibly even nationalization. I hope to be out of mining shares before this occurs as should anyone with a troy ounce of sense.

  11. alex

    not sure anyone should be betting a burrito in 2012…..i imagine they could cost $5000.00 or so by then πŸ˜‰

    call me crazy, but have been making little trades here and there for a day/ two//etc based on large volume increase nearing breakout area….

    ex bought 3000 CGR at close yesterday…still open

    bought VTO last wk, closed 1/2 position

    closed PZG and NAK after run up

    risk is high , but watching closely..yesterdays discussion board here was easily avoided πŸ™‚

  12. alex

    and for honesty sake… πŸ™‚

    and bought GMO @ 5.70 for a quick trade last week with volume surge…held on too long and am in losing position.

  13. Ollie

    Gary, I take your point and agree that miners showed relative strength in those periods vs other stocks however between July 2007 and Nov 2008 many miners have lost a lot of value…

  14. aaronpalang

    The SnP seems to keep fighting this down trend, its truly impressive. When it breaks though, it should easily pull gold down with it…
    The question is though, from what level…

  15. DG

    Alex: A “trade” that turns into an “investment” (because you wound up in the hole) is a great way to lose money. Cut the losses short! If you are in the hole, get out. You don’t want to lose money waiting for a bottom in gold. It will cost you not only what you lost, but the loss of gains on that amount that is now gone, as well. If you bought for a reason (“this is the bottom”) and are in the hole, the mkt showed you you were wrong. Why hold on? One of my favorite mkt aphorisms is: “It is fine and expected to be wrong. It is criminal to stay wrong.” Good luck!

  16. Gary

    Ollie,
    08 represented an 8 year cycle low for gold. It’s no surprise the sector got beat up but it’s also the only sector that bounced right back iand is trading at new all time highs.

  17. T.J. Rand

    Revan-

    Agreed on many points…however I believe the most economically stable countries in the future will be Asian- so assets in Singapore, Hong Kong (assuming the PRC doesn’t have it in for US Citizens) even Australia or NZ might be prudent. Or simply buy bullion offshore through GoldMoney, BullionVault or Perth Mint.

    Residency is a different matter – much depends on the cultures you are comfortable in – but there are options in South America and Asia, even Europe.

    If you’re interested, there’s a blog that covers a lot of this ground- Sovereign Man, run by Simon Black, who advocates diversifying citizenship, residency, business location and asset location among various jurisdictions. Agree or disagree, it’s excellent food for thought.

  18. alex

    92000

    yes, thats impressive volume for a bank stock (at 10.30 a.m. has 2 million)…maybe they invest in burritos for the future price increase?? πŸ™‚

  19. alex

    DG

    I believe what you are saying 100% and thx for that. I actually am not planning on holding much longer (tho if the mkt falls apart my losses will increase)

    I am holding for loss no bigger than 8 to 10% on that trade. Volume was light on pullback , so i didnt panic…but its getting close to a sell. it is oversold here a bit, but again..if the MKT tanks anddrags it down, I am out quickly.
    thx for your insights though.

  20. DG

    OEXers buying tons of calls again today. They have really nailed this whole thing. Maybe the market will simply never go down again! I do not plan to short until they do.

  21. pimaCanyon

    DG,

    Historically have OEX options buyers generally been on the right side of the market? Going back how far?

    What is your data source to get this info?

    Thanks!

  22. Revan

    T.J. Rand:

    Asia … maybe, maybe not.

    Singapore had a run recently and is identified by many (too many ?) as a “safe haven”. On the other hand Singapore is a rigid – one party – political system dealing with a multi-religious population. Not a good basis for long term stability by all historical means.

    My problem is, I have no idea what is really going on under the hood in Singapore or Hongkong far away here in Europe.

    My sceptizism is driven by the observation, what even well educated people or media like the NYT know and understand about Germany for example.

    And with Germany we are dealing with a western country with at least similar culture and basic believes as in the US. And Germany is the 4th largest economic power in the world, so some understanding should be expected.

    Nevertheless what is written and known about Germany even in a NYT or WSJ is “shallow” to say the least – far from what is really going on.

    Now transport this awareness to a complete foreign culture as in Singapore and you understand what I mean.

    I believe we are drastically underestimating the risks in such “safe heavens” because we simple dont know them and are overestimating the risks in our own country, as we understand them well and are annoyed about them every day.

    To say it in a simple sentence : the gras is always greener, on the other side of the fence πŸ˜‰ I dont say, there isnt “green range land” somewhere, just dont underestimate all the risks you cant even formulate from thousands of miles away.

  23. alex

    hey guys ,

    Freaky Friday is this week…otherwise known as triple witching.

    It is rumored (no link, because i didn’t just read it, I have heard it…) that in most cases , the December triple witching regains all losses for that week.

    anyone else have opinion on this Friday??

  24. Carlos

    I was told, by a financial adviser, that we can have a simultanealy drop of US$ and €uro, in the next few days, that will take a high move in Gold.

    As any of you heard about that. These actions are rare but had already happened.

  25. oa92000

    carols, “I was told, by a financial adviser, that we can have a simultanealy drop of US$ and €uro, in the next few days, ”

    did he say any reason? I look at macd for US$, it looks like going to drop, but who knows, anything can happen.

  26. pimaCanyon

    Thanks, DG! How much weight do you give this info (the OEX put/call ratio) in your trading? For example, if your system gives a signal to short the market, but OEX options are heavily weighted on the Call side, would you not take the signal?

  27. DG

    It depends (sorry for the mushy answer, but it really does). How lopsided is the PCR (put/call ratio)? How lopsided is the other stuff? I use a “weight of the evidence” approach. Right now there is so much stuff calling for a drop, if the OEX stuff were even neutral I’d short anyway if we started down. But I would wait if the OEXers were buying tons of calls. I expect to be short by 1/1. And maybe today if we can start down…?

    Gary: your example of an 8% drop and missing the entry and exit, and several false starts, which whittles away at your gains down to 4% assumes equal amounts. The probes I have made so far have been tiny and I have lost less than .5%. When we start down I expect to be there in size. And, yes, I know it’s not easy, but almost nothing worthwhile is easy, nor can good things be done without practice, discipline, and expertise. Weightlifting is not “easy” but you have worked at it, have some talent for it, and love it. Trading is that way too. As always, I will let you know how I fare.

  28. DG

    Hey Pima! Take a look. The OEXers just switched to a lot of put buying in the past 1/2 hour, with now more puts than calls. They are no longer arguing against a decline. Interesting.

  29. Razvan

    eur/usd placed a gravestone doji yesterday reversing all the gains made throughout the day which indicates a bearish outlook. The break of resistance without any follow through also confirms the head fake.

  30. pimaCanyon

    Thanks for the heads up, DG, on the put buyers coming out in force now.

    Have you given any thought as to why the OEX put buyers generally get it right, while overall options buyers are usually a fade?

  31. DG

    The OEX traders are professionals using options to hedge their portfolios. Most options are bought for speculation and thus prone to buying calls when excited or puts when depressed. It’s a little like SoS being smart money. And it’s a bit self-fulfilling like SoS: when the big boys start hedging their longs it means they are no longer buying…so down we go as that support is removed.

  32. Brian

    Carlos, Currencies trade in pairs, i.e. EUR/USD, EUR/JPY. They could both drop against other currencies, but not against each other…….

  33. DG

    Notice that it is barely more puts than calls. I’d expect to see it somewhat lopsided before we start down, but no indicator is always right. At least it’s not arguing against a decline any more.

  34. Redwine

    Following is a link to a partial interview with a supposed London Bullion market insider about Asians presently buying huge amounts of paper gold and silver w/o causing a spike in prices.

    If this is true it might be what’s holding the market up. It seems to me that when paper starts bidding for physical, which doesn’t exist above ground, the prices will skyrocket.

    I’m not talking about market manipulation here, just the fact that there’s far less physical PM than paper PM.

  35. DG

    Not really, as it’s not something I have studied much. Expiry day tends to be non-volatile (small moves like today) and the Monday after expiry tends to be weak, so Monday is likely to be down, other things being equal (which they rarely are.)

  36. alex

    so far this doesnt feel like a ‘real’ move or sustainable one, even tho the dollar is rallying ( up .70)

    Gold stocks not really selling off with added volume (as of yet) and almost really look ready to bounce.

    crazy

  37. Gary

    DG,
    From time to time a big number misses entirely. However I think this is probably a sign that big money will continue to buy dips until at least Christmas.

  38. pimaCanyon

    So we have slightly conflicting signals in stocks: large BoW on SPY indicating more upside is likely, and more OEX puts bought than calls indicating a move down is likely.

  39. DG

    Pima: the OEX numbers are really neutral, not bearish. It needs to be lopsided to indicate much. All we can say is that the OEX number is not arguing against a drop (as it has been lately with tons of calls being bought). I do not agree that it is indicating that a move down is likely. Today’s reading is like a +25million BoW number would have been: slightly interesting but not saying very much. But let’s see what the late after-the-close posting is (around 4:30 ET)

  40. Poly

    Nice move in the dollar and the heat on the Spanish bonds only just beginning to heat up again. 2 day European meeting appears to hold the answer to where the dollar is heading.

  41. Robert

    SOS is the Morse code distress Signal.

    BOW stands for Becoming an Outdoors Woman.

    We are pretty cryptic here and are planning for Armageddon. We’ll be using SOS and the women here are training to BOW.

    Don’t get mad at me guys for telling this guy our abbreviations, I felt bad, and he needed to be informed. I still don’t think this will ruin our future getaway plans.

  42. Robert

    There is a lot more details on our SOS and BOW plans in previous post’s comment sections. You should look back at all of them if you’re going to join us in our survival procedures when the time comes.

  43. Robert

    To argue against the BoW in SPY today, we had a monster -527 SoS in Apple, a monster -293 Microsoft, and a baby monster -189 in Proctor.

    Now I know Gary will say that these numbers prove to be insignificant, but I beg to differ. I’ve looked back at alot of the bow/sos data and you rarely will see three mega SoS’s not near an IT top.

    We could chop sideways for a few weeks like Gary said, but I don’t see us exploding higher to SP5 1270+ with where we sit right now with volumes, dumb money confidence levels, the dollar cycle, and the stock cycle.

    I would be surprised to see anything more than one more dip down in the dollar with gold and stocks bouncing prior to the move down into the IT low. I never put anything out of the question though.

    Right now I’m short the Russell and energy.

    I’m looking forward to a 80.5 dxy/

    It also is very satisfying watching silver miners drop steeply when your on the sidelines πŸ™‚

  44. Gary

    Once the big money becomes convinced the cyclical bull is over we should see a huge SoS day where not only the SPYDER’s are dumped but every bellweather stock is sold heavily.

    It hasn’t happened yet but I expect it will during the next intermediate cycle.

  45. Robert

    The Russell 2000 Index Fund (IWM) shows volumes as follows for EOD today:

    Calls: 16,751
    Puts: 41,340

    A nice 2.47 put/call ratio. That will PUT me to sleep pretty nicely tonight πŸ™‚

  46. Poly

    “Big bull markets are rare, particularly bull markets that span the years or even the decades. Such bull markets may arrive once or twice in a lifetime. If you’re lucky enough or intuitive enough to spot one, you have the makings of a fortune.

    It’s extremely difficult to identify what could be a great and extended bull market. It’s just as difficult to enter early in such a bull market and ride it all the way to somewhere near the top. But it can be done. My old mentor, the great George Schaefer, identified the beginning of the fabulous bull market of 1949 to 1966. George entered that bull market in June of 1949, the very month that it started, and he rode it, along with his subscribers, to somewhere near the 1966 top. George used every correction in that bull market as an opportunity to add to his portfolio, and he reinvested all incoming dividends. As a result, he made many of his subscribers wealthy beyond their wildest dreams.

    Now we’re witnessing another such primary bull market. This bull market in gold started around 1999 when gold was selling for 259 an ounce. I did my best at the time to push my subscriber into buying gold stocks (which, at the time, were selling at pitifully low prices) and into buying gold bullion. At no time since then have I ever suggested that we sell our gold items. Nor do I suggest that now. “

    – Richard Russell – Dec 15th 2010.

    Although we’re bopping and weaving this bull to some extent, I thought you would at least get a kick out of this passage by Richard today, along with some big picture inspiration.
    Let the good times roll and enough of the doom and gloom, hoard water, canned soup and bullion nonsense!

  47. EricH

    “At no time since then have I ever suggested that we sell our gold items. Nor do I suggest that now.”

    I’ve been a subscriber of Richard Russell for over 10 years. This statement is false because in 2004-2005 he suggested investor lighten up on Gold stocks and stick to the metal instead. He did the same in 08.

  48. DG

    Robert: You wrote,
    “The Russell 2000 Index Fund (IWM) shows volumes as follows for EOD today:
    Calls: 16,751 Puts: 41,340 A nice 2.47 put/call ratio. “
    Are you suggesting that these are smart money buyers? Have you run a study on this? Every option group (except OEXers) is usually wrong. I’d have guessed this was dumb money loading up on puts, which usually happens before a rally…?

  49. Robert

    DG,

    No studies. I just started looking at the OEX after you started pointing it out the other day. All I know about the OEX data is pretty much what you’ve been saying. I actually give that data no credibility because I have no history with it, but it seems you do, yet your convictions at the moment seem to be unguided. This indecision in the short-term (weeks) direction of the market concurs with seasonality combined with cycles. Right(?), cycles point to a IT top and seasonality points to continued upwardness.

    I just see the down side with a greater extent than I do the upside right now, especially with the Russell, which has almost gone parabolic the last few weeks. I have yet to find a more stretched index right now than the Russell. I have a 4/1 short ratio of the Russell/Energy.

    I don’t like to talk exuberantly about any position besides gold or silver because those are the only Bulls around. Any other bet has much less likely odds than long gold or silver, as we all know here.

    I’ll just watch how this plays out.

    Side note. All the money I’ve ever lost in realized losses in the market were from shorting. I was gritty and wanted to quarrel with bull markets in the past. Lesson learned at 21. Hopefully I’ll be alive until 41 so I can make some real money πŸ™‚

  50. Robert

    Right now it appears gold/silver are showing weakness, the dollar strength, and equities indifference (arguably minor weakness). All of these indicators (yes I know things looked much different yesterday) seem to coincidence with Gary/Doc predictions about an IT low coming in gold and silver, and a daily cycle or two up in the dxy, then once finished with that a 3-year cycle low in the dollhair, with a c-wave top in gold silver. Can we get a $2000 gold, $50 silver next Spring/Summer? That would be quite sweet wouldn’t it? πŸ˜‰

  51. Robert

    Yes I am biased with Gary/Doc predictions but it would be dumb not to be. That said my remarks I think still ring true: dxy flirting with 80.3 today, and gold 137X’s.

  52. DG

    Robert, I rely on Jason at sentimentrader.com for most of those type of studies. he’s the best sentiment quant there is. He tracks OEX traders on a daily, 10-day, and 21-day moving average basis. He has never indicated that any other specific group (like Russell Index traders) is of any value. Overall PCR’s are of value as a contrary indicator. Right now most dumb money PCR’s are showing tons of call buying (so bearish) and the OEX guys are neutral on every time frame.

  53. Robert

    DG,

    Thanks for that insight. I plan to subscribe to sentimentTrader soon, but am just too busy with work right now.

    OT: Would anyone here like to share their viewpoint on LASIK eye surgery? At the moment I’m leaning towards not getting it because of dry eye, loss of visual quality, etc. I may just have to bite the bullet and find a relationship with contacts.

  54. Robert

    Steven, what I said I’m sure was very confusing. I’m talking very very short term weakness in gold/silver, and very very short term strength in the dollar. These are talking daily cycle shortness and if taken out of context can be totally and utterly false (which they are). Silver weakness at 28.89 one would say! Hell it was 18 three months ago!

  55. aviat72

    Regarding safe havens. I think Brazil, India & South Africa are the best bets. They have democratic systems where systemic changes can not occur overnight; you are unlikely not have an “All Your Base(and PMs) Are Belong To Us” kind or moment there which can easily happen in China/Russia. Singapore is too small and is not immune to the “All Your Stuff…” kind of ruling.

    In India the reach of the government is limited (huge underground economy) and no one is going to part with their gold. The Indian economic growth story is primarily an internal organic growth story with comparatively little dependence with the global economy. Both Brazil and South Africa are resource rich and there is an implicit underlying backing of “stuff”. Both have large enough local population to be viable economies even if the rest of the world is in trouble.

    Australia is too tied economically to China and politically to the Anglo world to escape unscathed.

    I have heard that land is cheaper in Latin America compared to the fertile parts of India. So that might be one place to look for. The problem is that there are no Brazilian REITs or other partnerships which can take interest in land holdings etc. for the average investor to put their money in.

  56. maria

    I apologize for the length of this my first post to your blog. I had to vent a little bit though bcause all this doom and gloom talk is so pervasive today. I have been trading equities since the mid 1970’s. Whatever the predictions for a coming collapse in 2012, the belief that the USA is going to end up a third world is pointless right now. The amount of doom and gloom in the market since 2008 is enormous and if anything tells me we could continue to grind higher, but who cares as long as I have protection in place. The nice thing about having been an investor for so long is the experience it gives you. I saw the same doom and gloom in the mid 1970s when oil hit the unheard of price of $30.00 a barrel and we lined up to buy gas on weekends. Stocks fell 50% in short order. While the market recovered, it took years for investors to regain their confidence. Same thing in 1982, 1987, 1990, 1998, 2000, 2001, and 2002. Investors still do not seem to understand that markets move both ways, up and down and the important thing is to trade what is presented and learn to use the enormous arsenal of tools that are available to every investor, today. These tools offer the opportunity to make money both in up and down markets and protect positions. Yet investors still lose huge sums of money in equities. Instead of trying to second guess the market, follow the market trend and learn the dozens of tools that today are available to every investor. Think protection and risk. Whatever the market is going to do by 2012 is best guess at this point. Yet the level of fear in this market is thick enough to cut with a knife. I can tell you I do not have a clue what 2012 will bring, what gold will do or (perhaps more important) silver will do, but I can tell you that no one else does either. Trade with protection in place and forget worrying about 2012 and stocking up on canned beef. Learn to take advantage of the opportunities markets such as ours present.

  57. n1tro

    following a trend is easy to say but what you are saying would involve picking a point and longing or shorting and just sitting there until the trend reverses. Problem is, most can’t determine the best entry point for the full ride and many others don’t know when to get off before the ride is over.

  58. Revan

    @ aviat72,

    I agree with your analysis – except South Africa which is extrem unstable (politcally) under the surface. Btw one reason why I am very sceptical regarding South African Gold Miners like Gold Fields – although the stock looks cheap from a fundamental perspective.

    Yes buying farmland in South America is not easy, but at least there is one stock that comes near:

    CRESY
    http://www.cresud.com.ar/cresud/index_eni.htm

    With Cresud you buy farm land, crop production and beef cattle Production in Argentina and Brazil.

    Not the worst idea to protect in a “great depression”.

  59. aviat72

    The problem with CRESY is that it is publicly traded equity which will follow the ups and downs of the stock market. The liquidity is good but the correlation to the equity markets not so good. Some what like the miners versus the PMs themselves.

    Regarding South Africa, though there is social instability due to the checkered past and economic disparities which it created, I am not sure how much it would translate to economic/political instability, in the BIG picture. A riot in a ghetto does not translate to anything major on the economic front. OTOH it may not take long for a CCP general to start reading the “All Your Precious (and Base) Metal Belong ….”; they have already started the trend with Rare Earth Elements!

  60. alex

    MARIA…

    Thanks for sharing your thoughts , but isnt once enough?? JUST KIDDING haha πŸ™‚ we used to be able to remove our own posts, but I noticed you cant on here anymore.

    ROBERT

    LASIK…I have 3 friends that all got together and had it done together. Their eyes were bad , “I cant see the clock in the morning , your face is blurry without contacts,’ etc

    Today all 3 see just about perfectly, but all 3 also have A NUISANCE problem seeing at night with ‘halos’ glowing around car headlights and streetlights. despite this, all 3 say they would do it again…best thing they ever did.
    so I guess you hear the stories of good vs. bad , pro’s & cons and just imagine that if they all happen to you (because they can)–can you live with the good & bad.

    just my thoughts, hope it helps

  61. alex

    Maria..

    there is a little trashcan at the bottom of my last post (only the sender can see it) and I can remove my own post clicking on it.

    so if you log back in, you can remove your own posts πŸ˜‰

  62. Gary

    Maria,
    Actually sentiment is hardly bearish. It is in fact more bullish than at almost any other time in the last 10 years.

    And I’m just pointing out the obvious fundamental downside. The fact remains the world created a credit bubble in the vain attempt to halt the bear market that should have followed the bursting of the tech bubble.

    It’s happened many times in history and every time it has been followed by a depression. This time will be no different than any of the others other than the form the depression might take.

    If central banks continue to print massive sums of money we will eventually destroy the currency markets and that will lead to a hyperinflationary depression instead of the deflationary one we should experience.

    But yes, as you point out we will eventually get through this. Humanity always finds a way eventually no matter how many wrong turns we have to take to get there.

  63. Shalom Bernanke

    Before ‘aviat’ buys farmland in South Africa he might want to see the pictures of what is happening to farmers there.

    Raped, gutted, and all sorts of disgusting stuff. Even the police raped a woman who was seeking to make a report of her rape earlier in the night (and in front of her husband).

    Genocide of the Boers is in full force.

  64. alex

    Gary,

    I have heard Bernanke say that they are injecting liquidity , and will remove it at the right time to prevent hyperinflation.

    Any idea if they could possibly do this or if they’ve revealed how they plan on doing this?

    I’m just wondering if the 3 yr dollar low comes and goes without flushing everything down the toilet , as your 2012 commentary feels we are headed. thx

  65. Gary

    Alex,
    When has a central bank ever got it right?

    In order to withdraw liquidity in time Ben would have to start way in advance (think turning the Titantic) That means he would have to start withdrawing liquidity while we were still in the recession.

    What are the chances that happens? I think we all know it’s politically impossible.

    So we will of course have a serious inflation problem develop (I dare say it’s already developing).

    The real problem comes if unemployment doesn’t improve but inflation starts to get out of control. What does Bernanke do in that situation. Does he really risk exacerbating the employment problem by slowing the economy to control inflationary problems and thus running unemployment over 20%?

    I say he’s backed himself into a corner there is no escape from. Printing money won’t create jobs. I think we’ve already proven that. Only a new industry can do that.

    So all Ben’s printing efforts are going to do is just continue to raise commodity prices while unemployment stays high.

    Eventually rising inflation will destroy the economy again and we will suffer another deflationary spell.

    It’s a vicious circle that can only be broken by either allowing the world to suffer through a deflationary depression and cleanse debt from the system or by the next new industry coming online that will supply the productive capacity for us to “work” our way out of this mess.

  66. alex

    Thanks Gary

    Thats quite a catch 22 with the inflation during an unemployment crisis. A vicious cycle where no one can afford to buy , spending halts and goods (inventories) pile up…so more lay-offs. Cant even picture 20% unemployed!!!
    Even now the ‘normal citizen’ falling on hard times is getting more and more violent/protesting , etc.
    remember when extended credit & refinancing seemed more like a gift– than a noose?

  67. Revan

    Gary,

    I hate to say that, but the US is not the world.

    I am sure you are basically right with your analysis, at least from an US viewpoint. Nevertheless there are huge historical forces at work in the present world, that superpose the effects you correctly described. One to two Billion people moving from poornees to middle-class prosperity is one of this major forces nobody should underestimate.

    Although Helicopter Ben surely thinks he is the master of the universe, he definitly isnt.

    I dont say a worldwide “great depression” as you describe isnt in the cards. It is in fact, with the insane Ben at the helm. But this scenario is by no means that definite as you seem to believe.

    Never ever in the history of the world, there were such powerful diverging forces at work at the same time. And that is the reason, why any comparision with the past should still be respected, but not blindly followed.

    As I said above, be prepared for the unexpected and unthinkable.

  68. David Kafrick

    I tend to agree with Maria.

    Even though sentiment could be bullish right now, it is a very fragile bullish sentiment, as it has been since the rally started in march of 09. What I mean is that any correction that lasts more than a week or so and/or drops more than a few percentage points is enough to bring back extremely bearish sentiments and everyone starts running for the exits. I don´t see how we could have any sustained decline while the trauma of 2008 is still very much alive inside everyone´s head. The feeling that I have, talking to lots of people in this business, and to lots of retail investors, is that most people are still very much afraid and very alert. I don´t see any complacency.

  69. Gary

    Rav,
    Some will surely fair better than others. (countries with little or no debt like China) but if the largest economy in the world rolls over into a depression it is going to drag everyone down with it especially since most of Europe is in the same debt situation if not worse.

    China won’t be able halt the laws of economics any more than Ben has been able to.

  70. Gary

    David,
    You are just describing basic human nature. We are very short term oriented. That’s why markets go down differently than they go up, and why intermediate declines tend to last 1 to 2 months most of the time.

    It takes about that long for sentiment to completely reverse to bearish extremes.

    A bear market starts when something fundamentally breaks. In 07 it was the subprime market that damaged the finacial system.

    This was then exacerbated by Ben spiking energy prices and the credit markets collapsing in the fall of 08.

    The next bear market will probably be caused by soveriegn debt problems in Europe escalating beyond the ability of Germany to bail them out and again will be exacerbated by the Fed’s easy money policies spiking inflation pressures into a high unemployment environment.

    I expect Spain will be the tipping point as we already have oil running up over 100% in a year. When the dollar moves down into the 3 year cycle low that should be the final nail in the coffin to send the economy back into the next recession.

  71. Gallo

    Gary, I know at least as of late it’s been dollar up everything else down and vice versa. At some point once the dollar exhausts its short term move higher do you think there is a possiblility if not a probability that the relationship changes so that as the dollar moves down although gold continues higher the general equity markets move lower? That’s exactly what happened in the bear market of 2000.Dollar down Dow down gold up. The bear market in stocks begun and I wonder if we are on the edge of the same situation developing again.
    Best.

  72. OptionsOnly

    Gary, recently you have mentioned several times that the markets are due to go down into the “half cycle low”. Which “half cycle”? The daily, intermediate? Please explain “half cycle” as I did not see it in the terminolgy doc. Thanks!

  73. ike

    I was intrigued with the discussion of looking at the SOS numbers for GLD in relation to the Gold cycle.

    However, I am visual and needed to see it.

    The evidence is compelling that as gold gets deeper into the timing band for an intermediate correction, the SOS numbers pop up.

    http://i53.tinypic.com/rvj9s6.png

  74. DG

    Thanks, Ike. Interesting. Were there false positives? That is, were there times the SoS numbers happened in a clump and gold did not top out shortly thereafter?

  75. Gary

    Gallo,
    Yes once inflation becomes a real problem the stock market will stop responding to a weaker dollar just like it did in 08 with oil trading parabolic.

  76. Gary

    Options,
    The daily stock market cycle usually dips at about day 20. This is due to the dollar cycle being shorter than the stock cycle.

  77. Poly

    IKE, that’s good work appreciate. I think DG’s question is very important, you would want to see every GLD SOS instance on that chart to back the theory.

  78. ike

    DG, Poly

    I was just looking at the times when Gold was in the timing for an intermediate correction.

    Going forward I will pay attention to it.

    But if there was a false SOS and not in the timing for a correction – I would just watch it

  79. alex

    Just closed the trade i posted yesterday

    3000 CGR @ $1.66, was up 20% today alone . Closed at $2.10

    VTG hit $2.25 yesterday, closed at $2.10 also

  80. Gary

    It always takes a while for the market to roll over, especially after such a strong rally and in Dec. Dip buying has worked for a long time.

  81. alex

    the GLD has 10 million shares in the first hour , and has sliced through the 50dma (so far). this will alert tech traders i.m.o.

    stocks are not selling of too bad (3% on avg) , but we’ve all seen reversals and we’ve all seen waterfall sell offs that just pick up and cascade down.

    I”ll watch for volume to pick up πŸ™‚

  82. Gary

    Gold is the cyclical driver of the sector. Everything else follows gold although one or the other can show relative strength like silver did recently or Platinum during the last bull market.

  83. Ollie

    Gary, the miners are getting closer to the 50 DMA which has acted as support for the daily cycly lows during the recent runup from July. Can we expect the 50 DMA to be broken through if we’re in an intermediate decline and use the 200 DMA as a rough target to start stepping back in (if, of course, we’re in the right timing band as well) ? Thanks

  84. maria

    Thanks Gary for fixing my previous comments. When I mention the bearish sentiment I am talking about the overall investing climate. Most investors just look at the VIX or newsletter sentiment. Instead look at trade volumes since 2007 and read in trade papers such as WSJ, etc and you can see that the vast majority of investors are waiting for the “second shoe” to drop and refuse to get into this market. They have little faith in this market. Every move higher is met with skepticism and any selling is called the beginning of the next bear cycle. When your brother-in-law or barber are in the market, that’s the time to sell. In this market, when the fed stops printing money, that will be the time to step aside and see if the market can “hold its’ own”. If not then it would be a waste of capital to stay long. It’s not rocket science, it’s investing.
    For those who doubt the ability to trade the trend, it is simpler than most think. It’s not a matter of going long and short the market, but following the overall trend and trading a variety of products, sometimes daily but often, weekly. When I started investing there were very few of the terrific tools now available. Today everything from derivatives to options to ETF’s and 2X and 3X funds, etc., offer the investor terrific returns if you are willing to learn how to use them. Paper trading is the easiest way to develop your strategy and perfect it. Then start small. There are some excellent books available on trend following, on derivatives, options, etc.. There are also some excellent websites. Instead of preparing for the end of the world and stocking up on provisions, learn the today’s exceptional investing tools and as Warren Buffet would say “embrace the bear” when it happens and it will happen, because it always does.

  85. Gary

    Ollie,
    We will get back in when gold forms a swing low in the timing band for the next cycle bottom. That’s still at least a month away.

  86. alex

    Gary

    I respect and appreciate your cycle analysis and this blog..it has helped me to better time my trades (I was unaware of cycles).I use charts/volume/and a few special indicators I have developed and now I add cycles (with your help & Doc) to my toolbox πŸ™‚

    I would like to share this idea with you and your bloggers too…
    nothings ever etched in stone but just please notice what I have seen/done in prior corrections with gold.

    2yr chart daily of gold…April 2009 low, July /Aug 2009 low, Feb 2010-April 2010 low , and July 2010 low–

    each correction bounced right off the 150 sma…and I slowly entered positions…beforeI found you (Toby) in July of this yr.

    see link…it also gets us just below $1300 (currently 1275, but moving up).

    http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=2&mn=0&dy=0&id=t13658690070&r=8325&depth=24&listNum=&cmd=chartnotesflash,739|732

    just an added visual πŸ™‚

  87. Gary

    Maria,
    Actually it’s not quite as simple as that.

    Whether or not the public is in or out will be irrelevant (most are still in to some extent in their 401K accounts or they are invested in bonds).

    We as traders need to watch for something to “break”. When it does the next bear market will start and it won’t matter whether Joe Six Pack is in the market or not.

    We already have the dynamics in place for that to happen as the economy is weak and mostly being supported by government spending and Ben’s printing press.

    If Spain were to crash the European debt market and Ben spikes energy too high then the next bear will begin.

    I expect that exact scenario to unfold as the dollar drops down into the three year cycle low this spring.

    The market should then begin the next leg down in the secular bear market bottoming in the timing band for the next 4 year cycle low (sometime in 2012).

    I can’t tell you how many people have ignored these cycles to their detriment. The 4 year cycle will come and it will bring another leg down in the bear market. All the Fed can do is exacerbate the problem which they are doing with flying colors.

  88. Gary

    Alex,
    I suspect if gold can make it back to the 150 dma it will be very close to a bottom. I would wait for the swing though before jumping in.

  89. Redwine

    Maria

    I agree with you that we should go with the flow but it’s possible to do this while having essential provisions stored for a SHTF scenario. They do happen and people do panic. Why not have the added insurance for a black swan event (low probability…..high consequence). Grocery stores have about one day worth of shopping before empty shelf time, in a panic. Most provisions are shipped in over highways that could easily end up bottle necked. Can you explain your problem with other people storing up food/ammo/etc?

  90. DG

    Gary: Do you have a sense of what will be happening that may spur you to switch to physical gold (from miners and AGQ)? I am not expecting or predicting collapse, but I have to admit it seems quite possible. I find that dramatic events take some emotional forethought to get them right as they unfold, so I am asking now, though I wouldn’t expect its necessity for at least a year, even if it were to happen. Have you thought about what clues will get you to sell miners and buy coins/bullion?

  91. mamaloshen

    Just my opinion, but I think it’s quite possible the stock market will correct very little here, with the pm’s taking most of the hit.

    Institutions are taking profits now in winners like energy, basic materials and tech stocks so they can show clients how well they’ve done. Then they buy these same things back in January. We could get a down or flat market into January, then a sharp move up, while the pm’s get taken to the cleaners.

    Take a look at stockcharts and key in $spx:$gold (daily chart) and you will see what I mean. The ratio is now in an uptrend. Although I never short anything, if one were to short, I think it would be more profitable to short gold/silver than the stock market.

    March has often proved to be a major seasonal low for gold. Maybe we will see it again in 2011 (not sure if this ties in with Gary’s cycles).

    Best to all.

  92. Onlooker

    ISEE Equity only call/put number just hit 577 on that spike up in the market. It’s been high all morning, in the 300s, but that is definitely the highest I’ve seen intraday. That’s almost 6:1 ratio among retail investors. Yikes! They’re buying that dip hard.

    And OEX numbers are slightly more puts than calls, so nothing compelling.

  93. David Kafrick

    A little off-topic, but has anyone read Pit Bull by Marty Schwartz?

    Just finished reading it, simply amazing. RIght up there with Reminiscences of a Stock Operator.

    Pretty entertaining moments when he talks about the few occasions where he had to run to the bank and get all of his physical gold out, because of fear of being confiscated.

  94. DG

    Seems to me that, if it gets that weird, it’d be better to own silver as with its many industrial uses it cannot/would not be confiscated.

  95. Gary

    DG,
    I would switch to physical if the gold:XAU ratio dropped below 4 or if I thought we were on the verge of a hyperinflationary event.

    Definitely a possibility but probably not in the next 5 years.

  96. alex

    DG,

    you know the gov’t would make you have a permit to own silver if it came down to that…and you’d have to prove your manufacturing need for it lol

  97. Gary

    Mam,
    Have no worries there will be a profit taking event in the stock market… there always is. Bernanke’s money machine just guarantees the rallies last much longer than normal and the corrections, when they come, are just that much more extreme.

    We’ve now reached sentiment levels on par or even more extreme than last April. We all know what followed that.

    That doesn’t mean we will see another flash crash, but I’m confident we will see a very severe correction.

  98. Redwine

    On the topic of when to convert from paper to physical Fekete and A/FOA/FOFOA have written much on backwardization being a good indicator of when to shift. This, I’m sure is well known among SMT readers, is when immediate physical delivery is valued higher than future delivery. I think one year out backwardization rather than the normal contango is where I’m leaning as this would probably be a strong indicator of impending hyperinflation.

  99. Nike Boy2008

    we have a SoS of 262M on SPY right now…and we had that huge BoW of like 300M yesterday…smart money is really working it and trying to trick the small investors..

    but hey we got Gary πŸ™‚

  100. OptionsOnly

    This market needs a catalyst for the correction. I think the catalyst will be the initial rejection by the House of the tax bill. Of course, it will pass later, but initially it will be rejected by the House, triggering profit taking in the market.

  101. Gary

    The catalyst is extreme bullish sentiment but the media will always manage to find a reason to explain why the correction happened

  102. Romeo Bravo

    Regarding SoS and BoW, don’t forget it’s not only Options Expiration Week, but also quad witching. This factor considers in for all the SPY BoW and SoS to a degree as well. That’s also why you get sudden intra-day reversals, etc.

  103. Steven

    Gary,

    I know gold leads the complex but do you think there is any significance to silver being up slightly with gold down? Could the silver attributes and/or other factors be in play that would cause the two to separate to some extent? Have you seen this happen in the past?

    Thanks.

  104. Gary

    I’ve never seen silver sepearate from gold for any significant length of time.

    Self taught. If I was schooled I would be hopelessly lost by now πŸ™‚

  105. Gary

    I’ve found the Q’s to be meaningless. The professionals measure themselves against the S&P not the Nasdaq. So when they think an intermediate correction is coming they sell the SPYDER’s.

  106. driver1

    Yes, I’ve heard you say that before and it makes sense, but perhaps the high amount in the Qs a day or two ago may have been a little warning. Maybe they did their little dirty then as a first move.

  107. OptionsOnly

    fwiw dept. I plan to buy Jan. puts on SPY sometime tomorrow as I believe since Friday is SPY ex-dividend day, market will still hang up higher, with the mini-correction actually starting Monday, lasting for just 2-3 days.

  108. Gary

    Breadth is deterioating badly. Just noticed the spike in new lows recently with the market at new highs.

    If I’m not mistaken this is the stuff Hindenberg Omens are made of.

    Usually I wouldn’t pay much attention to that and didn’t this summer because the market was in the timing band for a bottom. But this time we are late in the timing band for an intermediate top.

  109. Nick

    Gary: How do you reconcile the daily POMO injections with the intermediate correction? Sure there is huge SOS today and we are late in the cycle with sentiment @ extreme…but the Billions of $$$ via POMO is, I believe, a first in the history of the markets keeping it afloat…
    In other words, as long as there is POMO, the Bernanke Put or Fed Backstop, any correction will be quick and maybe 10-12% or so?

  110. Gary

    There were even larger amounts of money being thrown at the market in `09 and early `10 but the market still dropped down into intermediate cycle bottoms.

    At some point the market will suffer a profit taking event no matter how much money the Fed pumps.

  111. aaronpalang

    SOS at 577…sentiment is incredibly bullish and everyone expects this thing to go higher. Everyone gets proven right?
    Tis the season to be jolly I guess.

  112. Nike Boy2008

    Gary,

    It seems that a lot of blogs out there are calling for a top right now…how can everyone be correct??

    despite these SoS numbers, do you think that we will see a melt-up to maybe 1300 and then see that intermediate correction in stocks?

  113. Gary

    Unlikely. It’s taken 2 1/2 months to add the last 60 points. The chances of doing that again in a short time frame are pretty slim. The stock market is too liquid for big moves at the end of intermediate cycles. That’s reserved for thinner marekts like gold or silver.

    Plus we will be heading into the timing band for the daily cycle low in a couple of weeks.

    Sentiment is wildly bullish right now. It’s more likely that you just happen to be frequenting bearish blogs and mistaking that as “everyone”.

  114. David Kafrick

    Gary,

    Do you think there´s any chance that the Dollar will resume the downtrend in the next few days?

    I know that you expect a correction in stocks and in gold, which would mean there is more upside to the dollar, but I really feel like the Euro has hit some kind of bottom.

  115. DG

    Pima: Final OEX numbe rtoday is 14,000 puts and 10,800 calls. This is a ration of 1.3 to one, which is just modestly bearish. I’d like to see a higher number to say the OEXers are really betting on a decline. 1.5-to 1 or more would start to be a real statement.

  116. Steven

    FWIW, at least this time they are not just targeting silver as it seems like there are margin increases for many of their products. Copper’s increase seems huge! Of course they increase whatever is moving the most I suppose and copper has really been moving lately to new highs.

  117. pimaCanyon

    Thanks, DG.

    I bookmarked the link you posted yesterday, so I’m checking those numbers every day along with SoS and BoW. With a slight bearish bias on the OEX options and the large SoS number on the SPY today, it’s tempting to short here, but I will wait for a little more confirmation.

  118. K.K.

    FXI carries 20X more weight than the spy, when it comes to gold stocks…
    for all you trying to “force” a relationship between the spy and gold stocks.

  119. Gary

    A better plan would be to go long when gold forms a swing low in the timing band for it’s next cycle bottom…which is still about 20 days away I’m afraid.

  120. Jayhawk91

    From the prior page-I read Pit Bull by Schwartz. Great book, very entertaining…

    I think there were 2 instances when Marty thought the whole system was going to collapse (one was the Mexican default/crisis). He was freaking out carrying 250K worth of gold or something in his suitcase in the middle of NYC sweating his butt off.

    I thought about our situation and how we can imagine the worse case and convince ourselves that the end is coming. (Fall of 2008 was PURE fear. Absolutely crazy year and the market was on pins and needles day after day. That was the year I thought the whole system would collapse.) Maria makes some good points about “there’s nothing new under the sun” as far as the markets are concerned. I happen to think this time we actually may be near some pretty wild stuff unfolding during the next 5 years. Better safe than sorry…I’m trying to prepare.

  121. maria

    Redwine, Not really sure what you mean by having problems with people storing food/ammo etc. I don’t buy into the “end of civilization” or “America”. Even in the depression of the 30’s it made no sense to stock up on ammo and food. I’m in my early 70’s so my parents told me lots about their time in the Great Depression. I also don’t quite follow your comments about black swan events. As I said, by having protection in place any blak swan event such as last May 6 is just a money making event for investors such as myself. Not to harp but as I said earlier, use the excellent trading tools that are available today. When I started in the 1970’s very few such tools were available, but today there is a plethora of tools available to take advantage of the market and protect at the same time. Remember equities are called risk assets for a reason. I hold protection all the time. For example VISA today had a nice plunge and as I m in VISA I have puts. My Jan $65 puts that I bought for .25 cents I sold for 2.40 today. That’s just a small example. Holding spy puts is for many investors a no brainer. They buy them and roll them quarterly or semi-annually. The cost to keep that protection eats into about 3% of the total return for the year, but in this market, the premiums when the market drops like last May and again into August more than pay for the protection, they actually add to the profit. There are so many excellent resources available including dozens of well researched and written books. MacMillans book on Options is one such book – probably one of the best I have as a bible for dealing with options. But there are dozens dealing with derivatives and more. I read on a website, I cannot remember where but I am sure you can find it by googling, that you should “treat your investing like a business”. That author of that website has some excellent samples of his trades and he is bang on. Forget stocking up on food and learn to invest properly. Then you can afford to pay any price you want for food.

  122. Bede

    From Marc Faber’s Blog:

    12.15.2010
    I Have Been Lightning Up Positions.
    “I have been lightning up. I still have positions, because I don`t see a lot of alternatives. I own gold, silver, real estate and I own equities. ” – in Bloomberg

    Related: SPDR Gold Trust (ETF) (NYSE:GLD) , iShares Silver Trust (ETF) (NYSE:SLV)

    12.14.2010
    Energy And Natural Gas Outlook
    “Investing in the energy sector including natural gas is the best choice these days”.

    in Commodity Online

    Related: United States Natural Gas Fund, LP (NYSE:UNG) , United States Oil Fund LP (ETF) (NYSE:USO)

    We Can Have Somewhat Of A Recovery In The US Dollar

    “If I look around markets, we had a very negative sentiment about the euro six months ago. Recently, we had a very negative sentiment about the US dollar. From this very low sentiment level for the US dollar where everybody hated the US dollar, in other words we can have somewhat of a recovery.”

    in http://www.commodityonline.com

  123. TZ (7006)

    STEVEN,

    >Do you know what time they posted the margin increases for these products?

    The most recent email has a header showing it going out about 4pm eastern. But you never know when.

    The big silver crush a month ago had the margin hike go out noonish if i recall.

    Bottom line is you go to the CME site and can sign up to get on the email list. Then you get them when everybody else does. (Of course the emails and press release are when the MASSES get the notice. Clearly others know earlier.)

  124. Redwine

    Maria

    “Forget stocking up on food and learn to invest properly. Then you can afford to pay any price you want for food.”

    I don’t consider the two mutually exclusive.

  125. Steven

    Thanks TZ for the link and info. Seems like today will be interesting. Dollar getting hit hard but the PMs not reacting as much as one would think. I’m guessing there is some pinning action being attempted today given all the option expirations.

  126. Gary

    Convincing the average retail investor that he needs to buy expensive wasting assets to hedge his portfolio has to be one of the greatest scams Wall Street ever pulled on the public.

    One can buy ETF’s and eliminate company specific risk and position sizing will take care of downside risk.

  127. Shalom Bernanke

    I hardly agree that having food (and ammo) is unimportant. In the Great Depression, many Americans wish they had more food.

    As far as ammo, maybe not so much in the US b/c it didn’t see war in it’s backyard, but ask Europeans if they’d like more ammo and I’m sure you’d get a different answer.

    Besides, how much of a person’s net worth are we talking about? I’m positive nobody is considering putting something like 10% of their net worth in food/ammo. Where would they keep it all?

    However, they are still preferable to owning a third car, for example.

  128. alex

    KK…said,

    “FXI 200 day is 42ish—go long gold stocks when FXI hits its 200 day
    zstock”

    you stated that the FXI (Chinese)basically reflects when to buy gold
    …but then you state it’s because the FXI is at its 200dma…(weak in my book) . If its at its 200dma it is pretty weak lately…but the gold stocks werent…the gold stocks I look at are at their 20dma and 50dma. How does a weak FXI represent strong gold stocks?

    Further, the absolute best buy this yr (end of July/start of august) saw the FXI plunge back below its 200dma all through august

    So I am missing the correlation if FXI is a gold stock barometer.

  129. Gary

    That seemed rather goofy to me too. I’ll just stick with cycles.

    They’ve served us pretty darn well this year without having to resort to some strange correllation that really is no correllation.

  130. alex

    Yes…but now here’s the drawback…(If history repeats itself)

    last yr -the last wk of Nov & the 1st wk of Dec had that initial crash down in Gold–and gold stocks sold off first couple wks of Dec…(like this Dec)

    Then Gold stocks rallied Christmas wk thru the 1st wk of Jan before resuming the leg down into Feb low.

    So if history repeats, I’m going to get the big “I told ya so!!”

    πŸ™‚

  131. DG

    Here’s what the NDX has done from the 8th trading day of January through month end for the past seven years:
    -2.3%, -3.1%, -2.3%, -2.7%, -4.1% ,-1.6%, -7.7% with almost no rally at all after that 8th trading day. I hope we hold up that long because I’ll be short the Q’s by then.

  132. Gary

    I’ve noticed the cubes tend to top on round numbers most of the time.

    A speculator might put in a sell order at $55 and have a decent chance of getting close to the top.

  133. pimaCanyon

    Gary,

    It seems that some folks–Maria is one–are able to buy protection for their portfolios and don’t consider it to be a scam. In fact, she has said that sometimes she actually profits from the protection.

    One good reason I can see for using this method is if you believe a cyclical bull is going to last for more than a few months, you can buy into the bull and use puts to hedge your portfolio and even profit from the puts on large moves against the uptrend, the May flash crash being one example. The advantage to this approach is that you can hold your longs for more than a year and a day and get the long term cap gain treatment when you sell them.

    One could even use this strategy in PM’s. Instead of going back to a core position when an IT top is approaching, you could buy the double short ETF or buy puts or even sell covered calls against your longs.

  134. oa92000

    ” Gary said…
    That seemed rather goofy to me too. I’ll just stick with cycles.”

    I agree with gary. FXI has nothing to do with gold …

  135. Poly

    You don’t want to be carrying any put protection in a bull market, it’s a waste of good capital. But during all phases of a secular bear market, you would be crazy not to be hedging in puts, IMO.

    Hussman has a great model for put hedging which he employs with his growth funds and it’s well documented on his website. Well worth reading

  136. DG

    Poly: I am not an option guy, but it seems to me that in a decline the VIX and premium expansion would offset the wasting asset nature of the puts to a fair extent, no?

  137. Gary

    Here’s the thing with hedging. First off you have to guess when a correction is going to occur or you just throw money away on your hedges and reduce your gains.

    If you are good enough to guess when the correction is going to occur then just sell and lock in profits.

    Next you have to know when to sell your hedge or you run the risk of letting them just run back down to 0 when the trend resumes. If you are good enough to know when that happens then just buy back in.

    All hedging does for the average retail investor is saddle you with two positions to manage instead of one. And one of those positions is expensive and has a time factor built into it.

    Hedging is for large funds that can’t get into and out of positions easily without moving the market against themselves. Us small fry don’t have that problem πŸ™‚

  138. Poly

    Gary, you’re not guessing, that is the point. You’re rolling the hedge and catching all of the declines during that secular bear. Also if you keeping rolling the hedge with plenty of remaining time, there is much less value lost due to time.

    DG, you’re not chasing the put into a decline, you’re already hedged, so you’re not paying the “larger” premiums, you’re potentially selling into them.

  139. TZ (7006)

    Options are a GREAT way to lose money. That will occur almost completely and consistently with anybody trading them.

    There may be the smallest of portion that can make it work. Kudos. The odds are HEAVILY against for a number of reasons (there is a list similar to my earlier list as to why FACTUALLY shorting is rigged against you)

    Finally, a large number of people who SAY they make money on options actually don’t. They exhibit selective memory (a common human trait) remembering the wins and forgetting the losses and not netting them out. When forced to do the actual math (which few will do), they find they dont make money. They are just feeding off the excitement of gambling.

  140. Poly

    TZ I pretty much agree, but there is a difference between gambling/speculating and using an instrument to hedge. That’s the discussion.

  141. DG

    Poly You misunderstood me. Mu point was that if you buy puts properly you are buying when the VIX is low, and the expansion of the premium as the market goes down helps to offset the erosion of time premium as the VIX and premiums rise during the decline. A VIX that goes from 20 to 35 means the options rally even more than the decline would warrant.

  142. Poly

    Yes absolutely DG, sorry. When you experience 2008 like events, the premium is ridiculously good. Knowing how to avoid most of the premium is a big part of any success with options, IMO. Part of the reason why TZ comments are true is that people are jumping into well formed trends, call or put, and end up paying an arm and a leg to establish that position.

  143. TZ (7006)

    POLY,

    The mathematical complexity of an option makes it difficult for an unaided human to ‘hedge’ (vs something simple like a straight short, etc.)

    It SEEMS simple to say “I’ll buy a put against my stock and HEDGE” but the simplicity is the killer here.

    The actual ‘hedge’ is then a balance of the price you pay, spread, timeframe, non-linear price movement, etc.

    At the same time you are being countered by some of the smartest minds and computers in the world who are on the opposite side of your trade. It rarely works in your favor.

    Finally, the nature of options expiring at single points in time (as opposed to continuously and day allowing you too buy any duration) gives one more way for the people who run the system to take your money.

    The better answer I think: If you can’t handle a drop, then put in a stop or hold a smaller position. Simple.

    If a person s

  144. TZ (7006)

    The largest red flag that is in your face immediately upon entering the options field in the spread of multiple percent to engage in the transaction.

    That fact ALONE argues against the profitability. Something which has 2-5% or higher spread to engage in is already well loaded against you.

    The sole avenue which has higher odds is SELLING options and letting them expire (thus never taking the spread again). But that has unlimited risk on one side and limits gains on the other.

    Not worth it.

  145. TZ (7006)

    The spread on a gold future is:
    0.0073%

    The slippage on my stops is never more than 30 cents. It is usually 15 cents or 0.011%.

    The taxes on futures are 60% long term and 40% short term.

    I can get in and out 24hrs a day.
    I can get in and out with almost unlimited quantity (for my purposes).

    THAT is the game I prefer playing.

  146. TZ (7006)

    POLY,

    I understand. Options obviously make SOMEBODY money and they are a legit financial tool. So is shorting.

    But neither I think are the easiest ways to make money. That they are more difficult does NOT automatically equate to them being more profitable when they work (and thus justifying the added difficulty). Many people miss this point.

  147. David Kafrick

    I have to agree with Gary on hedging positions with options.

    I don´t think that there is free money lying around. If hedging your portfolio with options was really that easy, than everybody would be doing that and therefore options would be priced in such a way that it wouldn´t allow you to profit from it.

  148. sophia

    hi Gary,

    80.40 was the level that you were looking for on the $ Index, right?
    All chips are coming into place, aren’t they?
    πŸ™‚

  149. Poly

    TZ, again you’re on the money with your analysis and I agree. The argument I made, unsuccessfully, was that you can not lump every options trade into the “bucket” you described.

    David, I’m sorry but your logic on “priced to where nobody could make money” is flawed, IMO.

  150. Nike Boy2008

    there is absolutely no fear anymore..everyone I know is happily buying every dip and doing just fine…it feels like I’m the only one sitting in cash hehe

  151. Quality Stocks

    Long is right in the uptrend today.
    There are way way to many blog and comments calling for a top. This will melt UP next week and possibly the following week as well.

  152. Tudor

    Re: Low VIX and options.

    As an experiment, I’m taking a very small position in VIX call options. Yes, choosing the right strike and expiration is challenging, but in light of Gary’s cycle work, I’m anticipating a spike (or at least a healthy surge) above the current levels.

    Maybe I’ll get some lunch money out of it.

  153. Gary

    In my experience whenever you start thinkinig the market will “melt up” it’s about time to start selling.

    The stock market almost never melts up. Only thin markets like gold and silver melt up.

    The last time the stock market melted up was tech stocks in 99 & 2000.

  154. Beanie

    Everybody is expecting a pullback soon. Everybody and his bear.

    The super coopers are now back to talking about their heindenburgs.

    How does it go? — When everyone is talking one side….

    SPX 1500 coming your way.

  155. Gary

    There is a gap that needed to be filled on GLD plus don’t forget there is stil the possibility that gold is just now putting in it’s daily cycle low.

    If so there will be a bounce off that low. That’s why we keep a core position and why we never short a bull market.

  156. oa92000

    Jim rogers:”If you adjust the old high back in 1980 for inflation, gold should be over 2000 USD now.”

    gary, when will gold hit 2000?

  157. Onlooker

    Assuming we’ve got this interm decline coming in PMs “forecast” right, and I think we do, it’s a classic bounce today, with gold bouncing off the 50 DMA and silver the 20 DMA.

    That’s where we’ve seen bounces all along during this interm cycle and so it will embolden buyers who figure they just got a great entry point. Then we’ll roll over and they’ll buy the dip again, while we continue down into that interm low, on the little slope of hope.

    As for stocks, all we’ve down is bounce again to the top of this range while people buy calls hand over fist and the VIX drops some more. Getting under 16 just may do it, as that was the same low going into the April top.

    And getting a post-OPEX drop would be pretty normal as well. We’ve had a number of rallies get long in the tooth going into OPEX and continue to levitate, and then die the following week.

    In the meantime bonds have found at least a short term bottom, so a continued bounce with stocks falling will play well.

    The only catch is the Xmas bullishness that tends to prevail, as has been very well noted by everyone. Maybe this is one of those times when it fails, eh?

  158. Onlooker

    I also agree with Gary (and TZ) re: hedging, and especially options. It sounds quite good when you talk about doing it, but in actual practice it just sucks your money away. Paper trading a portfolio of longs and put hedges will demonstrate that very well and is advised before trying to pull it off with real money.

    And it does become very much like gambling for the average retail guy. They hit it big once in a while (maybe) and that keeps ’em trying again and again, hoping for that home run that gives them a rush. Of course in the meantime they throw away large amounts of money, one little bit at a time. The ones getting rich are the market makers and broker who profit from the commissions and spreads, etc.

  159. Poly

    Again the discussion was not around “trading” or “speculating” or “gambling” with options, I agree that, in the long run, is primarily a losing proposition. It was around a hedge, for a very small % of a portfolio, in a secular bear market. I’m not sure what “paper model” you’re talking about, but I know my hedges in 2008 and 2009 returned almost the entire value of my portfolio! I didn’t need to trade, speculate or market time to get it either.

  160. Wes

    @discreet shopping

    I’ve looked carefully at the graph in your reference and it looks to me like “liquidity” is a trailing indicator, not a leading one.

    Take another look at the graph and see what you think.

  161. Wes

    As an aside, my 50 contract lottery ticket QQQQ options will expire worthless.

    Less anyone feel obligated to worry about it, this was a straight gamble.

  162. DG

    Onlooker: I posted about the tremendous bearishness in bonds recently. Well, heres the bounce in TLT. Another day or three like this and TBT will be a buy again, IMO.

  163. Shalom Bernanke

    Options are a product geared to retail, and we all know what happens to retail. Wide spreads (illiquid), various greeks to factor in while most people can’t even trade one vehicle profitably just guessing up or down, and hefty commissions as a % of capital invested all add up to a suckers bet.

  164. Shalom Bernanke

    Even most insurance is a suckers bet. Does anybody think they’re in the business to pay out?

    Sure, catasrophic will spread an individuals risk and at a low premium, but even that is a money maker for the policy writer.

  165. Poly

    Options are very far from retail, but it’s true to say that option commissions are all “milk and honey” for the discount (retail) brokers.

  166. Onlooker

    DG

    Yeah, I agree. Tim Woods does cycle work on bonds and we’re right in the middle of the timing band for the trading cycle low (his terminology equivalent to daily cycle). But it should just be a counter trend bounce to continue down into the interm cycle low some time in Jan-Mar.

    Avg trading (daily) cycle is 21 days, so a few more days and then we should see it roll over again. I took a small long position on Wed (posted about it on Capital Observer’s blog). I’ll hold it over the weekend and have a quick trigger finger on it next week.

  167. pimaCanyon

    SB, I pay $1.25 per option, so commissions are no longer much of a factor. Neither is the spread, at least if the underlying has good volume. I was looking at GLD options earlier today and some of the January calls had a spread of 1 cent!

  168. alex

    Holy cow…This morning I decided to keep trading with 1/4 of my acct until the charts do not match my own criteria ( keeping full aware of cycle time).

    I have been posting my buys to be fair (and sells) like PZG and Nak and CGR

    today I posted EGI and GBG buy at open…then I bought NG and ANO

    had an emergency and had to leave…just got back , did anyone see what happened to NG on the last minute of trade??(these are short pops for when the chart signals me w/ low risk ,probable return)

    I will also let you know when I get crushed on that day that we wake up and gold is down $50.00…but for nowbuy & sell still works short term πŸ™‚

  169. Jayhawk91

    NG was pretty over sold off it’s top, I grabbed some mid day and then wimped out and sold for small loss.

    Gary-

    What’s the safest way to play this daily cycle bounce if one was game?

  170. Gary

    Jay,
    We may have already had the bounce. Being greedy at this point just runs the risk of getting trapped in the intermediate decline.

    Didn’t you make enough over the last several months to be able to just sit back and enjoy the holidays? πŸ™‚

  171. driver1

    Gary, I assume that if we exceed yesterday’s high in $GOLD, we’re good to go with our full PM position (with perhaps a stop below that day’s low.) Are those your thoughts?

  172. Gary

    If I had to guess I would say shipping has slowed down because all the Christmas stuff is done and the stores won’t need to reload til well after the new year.

  173. alex

    Jayhawks

    NG was tricky..on a monthly it was getting oversold on the Stochastics , but I watched a 1 day 5 minute chart and saw a flag pattern develop with each POP higher on good volume , each pullback on very light …I was going to sell it for the wkend too if it didnt pop out of that flag pattern , but then it just popped last few minutes…so I am holding on to see nxt wk.

  174. Gary

    Gold is clearly making lower lows and lower highs. I believe I mentioned that in last night’s report. That means the odds are higher that we already got the cycle low and that it’s already been violated.

    In that scenario you don’t want to be long with anything other than you minimum core position.

    Guys there are times when the odds are with you and times when they aren’t.

    When they are you press down hard. When they aren’t then you coast.

    It’s time to coast!

  175. alex

    yes,

    I forgot to mention…

    “your core position is what is comfortable for you”

    My core position to hold and ride is 25% and I trade 25%…and 50 cash from Dec

    but the trading is making good gains so far

    have a good wkend…

  176. Gary

    Alex,
    Just be careful. It sounds like you are playing with very volatile juniors. If you stick 25% of your capital into those things and they drop big premarket one morning you are going to be stuck either holding them through the intermediate decline or having to sell for a loss.

    Remember buying high and selling low is the only way to lose money in a secular bull market.

    Is it really worth the risk?

  177. LowTax

    Gary, take a look at that shipping chart again. Notice that it goes back to ’08 and there are no noticeable drop offs for the Christmas season. The only drop off is for the ’08 crash. Further, the current dip is of the same scale and has actually dipped lower. There may actually be something to that chart… maybe.

  178. maria

    Hey Jayhawk91, maybe you should have emailed me privately, ha ha. Unfortunately this forum has a word limit so when I was typing out my strategies, their results and how I apply them, it wouldn’t let me post it. I kept trying to shorten it, but then there are no details. So a couple of suggestions if Gary doesn’t mind. I belong to a yahoo forum called CoveredCalls – Naked Puts Option Strategies. You can search and find it. If you join there, use the same name “Jayhawk91” and just post that you joined and I will converse indepth there and post details for you and we can carry on the discussion there. But for a short answer on this forum I can tell you that I am never long anything. I trade regularly. I am not a bull or bear, just an investor. I learned 35 years ago to ignore the noise and follow the trend. I love double diagonals, bear and bull spreads, iron condors, and a new one I learned on a website last year which the author called a leap frog strategy. In a nutshell here’s my take. I have no crystal ball. This market reminds me of the 1970’s when, wait for it – everyone thought the world was going to hell in a handbasket, great depression II was around the corner, a world war could erupt at any moment starting in the middle east (oil embargo was on) and Time Magazine called an “END TO EQUITIES”, and yes by the mid 80’s gold was higher than it is today, in inflation adjusted prices but back then there were not nearly as many investing tools available. But I sure learned a lot about investing, as I lost about 40% of my capital of I think 15,000, I had a 17% mortgage, debt and bankruptcies were rampant, I lost 2 jobs one month apart and unemployment truly was at 15% although the government claimed 9%. I then learned a variety of strategies and never looked back. I am not saying to anyone don’t be concerned about what is going on. In fact I would be very concerned, but also be realistic. I can’t do anything if Obama or Bernanke want to destroy the economy and who knows maybe it will work out. But investing is all about learning strategies and perfecting them to match what is going on in the market. I love stocks and owning protection is simple, but I can almost guarantee you that most investors talk about it but they don’t buy it until the market falls, then they overpay for their protection and then whine about not being able to see decent returns and it “costs too much”. You can’t have it both ways. When markets climb protection becomes cheap. When it falls it’s too late to buy it. Well today the VIX hit levels not seen since April 2010. Doesn’t this sound like a good time to pick up some cheap protection? It’s not rocket science. If you are making reasonable returns in your investments, it’s a small price to pay to cover your “assets” so to speak. Just my two cents, but I wouldn’t be afraid of any market. Just learn the tools and forget about canned goods, bomb shelters, and ammo… I’d rather have money because in the end if the world goes to hell like so many predict then it isn’t going to matter if I am holding gold bars, or paper currency, basically it’s over. As I say, let me know if you join that forum. Gary, if you want to edit out my mentioning of the forum I certainly understand. You have a wonderful blog and I enjoy reading it so I wouldn’t want to infringe on it in anyway.

  179. Poly

    OK, forgive my skepticism, but the chart is a) posted on ZeroHedge, we know the bias of that site b) Who is the source? c) Who is “Nordea”? d) What speed exactly? d) There is no detail on the data, it’s source and compilation.
    Seriously now.

  180. TZ (7006)

    Lotta volume (2 mil shares) on SLW in last 5 min of closing. Steep drop at same time.

    Also, everybody’s favorite stock (that seems to be leading this bull) APPLE is now in a up-wedge formation. Daily chart.
    That’s bearish.

    I think the cracks are slowly widening.

  181. TZ (7006)

    >If I had to guess I would say shipping has slowed down because all the Christmas stuff is done and the stores won’t need to reload til well after the new year.

    Except there was no similar pattern last year for xmas.

  182. Jayhawk91

    Maria-

    Thanks for the reply-It sounds like have perfected your system and have learned through some hard times how to get ahead. Congrats and I’m always trying to learn from those who are farther down the path than me. Gary has been an absolute trusted person and I’m very glad to have found his site a few years ago. It has taken me a while to get comfortable with his calls, but he’s usually pretty solid and I think the underlying fundamentals are on the money for what we are trying to do here.

    Is this your forum on Yahoo?

    http://finance.groups.yahoo.com/group/CoveredCalls-NakedPuts_OptionStrategies/?v=1&t=directory&ch=web&pub=groups&sec=dir&slk=21

  183. Gary

    Maria,
    I don’t mind at all.

    I would point out that the Vix has been at or under 20 for most of the last 4 months. Historically that’s a very low level. One could have been buying cheap protection for that entire period and they would have been throwing money away.

    Unless one is prepared to buy deep in the money options with a delta of 80 or higher you aren’t going to fully hedge your positions.

    Just as an example let’s say you own $100000 worth of the cubes (roughly 1800 shares at today’s price)

    To fully hedge that and not get killed by time decay you would have to go out to at least March with a strike price of 59.

    The cost per contract would be roughly $5.00.

    To fully hedge your portfolio you are going to have to spend $9000. That’s almost 10% of your total portfolio on a wasting asset.

    If the cubes go nowhere in that time you will throw away $900.

    If the Q’s rise to $59. You will have made $8100 on your shares but lost $9000 on your hedge. In a rising market you would be much better off to use the $9000 in a profitable trade.

    Not to mention that in a rising market your hedge ended up costing you a loss of almost 1% instead of a gain of 8%.

    If the market corrects you have to know when to exit your hedge or you run the risk of wasting said hedge.

    The only time a hedge helps you is during a correction. So you have to know when a correction is coming or you are just throwing money away and preventing yourself from profiting in an uptrend.

    If you are good enough to know when a correction is coming then just take profits and step aside.

    Usually the more complex the strategies get the easier it is to lose money and it certainly costs you more in commissions and slippage.

    You can accomplish the same thing by sticking to ETF’s to eliminate coompany specific risk and position sizing to limit losses.

    And you can let someone else rack up commissions for your broker.

  184. TZ (7006)

    MARIA,

    >This market reminds me of the 1970’s when, wait for it – everyone thought the world was going to hell in a handbasket, great depression II was around the corner, a world war could erupt at any moment starting in the middle east (oil embargo was on) and Time Magazine called an “END TO EQUITIES”

    The major countries, states, counties, and cities in the world were NOT bankrupt in the 70’s. They *are* this time. (So are most people.)

    Total US credit market (what is owed) to GDP (what you can use to PAY FOR what is owed) ratio:

    http://static.businessinsider.com
    /~~/f?id=49d74ad14b54372b00134f9f

    Note that the 70’s are almost INSIGINIFICANT based on real financial distress. The 70’s were caused by bad policy and various mistakes. Yet the underlying strength was mostly still ok since entities were not generally BK.

    That is NOT true now. We have VASTLY exceeded the debt causing the great depression (and it continues to skyrocket higher). Unlike the 70’s, the vast majority of ‘assets’ that people around the world are holding are actually mostly worthless.

    Comparisons to the 70’s will not demonstrate the true damage that is coming.

  185. TZ (7006)

    GARY,

    I think blogger gives you some templates to adjust the formatting of pages. Could you please consider a different template for this page (the one where a person also leaves comments in the top right)?

    The page is exceedingly narrow and hard to read. Almost every URL has to get wrapped (possibly multiple times) to display. It even cuts some off.

    Isn’t there a quick switch that would give a display format that is wider and cleaner?

  186. LowTax

    TZ is correct – the scale of the problems is far beyond anything in the 70’s. This is a global insolvency – as TZ noted, most of the paper out there today is worth pennies on the dollar. The situation will continue to deteriorate for years, if not decades. The 30’s is the closest parallel.

  187. Gary

    I would have to agree with that.

    We have recreated the conditions that caused the Great Depression…not surprising since humanity does this about every 70-80 years.

    In order to move forward we need to let the systme cleanse all the debt from the world. The problem is we’ve kicked the can down the road for so long that the cure is now going to be so painful as to be unbearable.

    So instead of resigning ourselves and taking our medicine we continue to make the problem bigger and bigger. At some point the problem becomes so big that it overwhelms the governments ability to push it off any further.

    We are seeing that happen in Greece, Ireland, Iceland, etc. It’s just now beginning in some of the larger countries, namely Spain.

    Eventually the cancer is going to spread to virtually every country and that includes the US as we are one of, if not the worst offender.

    At the moment it’s a race to see whether the bond market or currency market will break first.

    If it’s the dollar then we will suffer the depression as a hyperinflationary event. If the powers than be finally come to their senses it will be the bond market and a deflationary event.

    Either way the end result of a credit bubble, especially the largest credit bubble in history, is going to be a depression. We just don’t know what form it will take yet.

    So trying to compare this to the 70’s is like trying to compare Mt. Rushmore to Mt. Everst

  188. TZ (7006)

    >We are seeing that [crisis spread] happen in Greece, Ireland, Iceland, etc. It’s just now beginning in some of the larger countries, namely Spain.

    >Eventually the cancer is going to spread to virtually every country and that includes the US as we are one of, if not the worst offender.

    Let me adjust that a bit. What is actually happening is that as each segment, level, or ‘batch’ of (worthless) paper goes BK, it is BAILED OUT/REPLACED, by paper from the NEXT HIGHER/LARGER ENTITY UP (which is still not recognized as BK…**YET**). This chain is continuing as we speak.

    So…a city is bailed by a county, by a state, by a region, by a county, etc.

    The TOP BAILER is the dollar/US (since we own and print the world reserve currency).

    The end game is clear…the bailouts continue up and up the chain until the last remaining entity – the US – goes BK too. Then the ponzi crumbles.

    We are already helping to bail out some states/people (indirectly) as well as the EU/IMF (which then bails out smaller entities like greece.

  189. Razvan

    I am with Gary on the option part. Those types of instruments should be for big investors with positions that cant be unloaded at the push of a button and thus must be protected against.
    For small investors with a few million dollars those instruments are only there to chew up their account and give them a sense of being a sophisticated investor.

  190. T.J. Rand

    Poly-

    Based upon your generally solid commentary, your comment on Zero Hedge caught me off guard. I am a frequent reader of a number of sources, and I find Zero Hedge’s articles and commentary to be generally cynical and always thought provoking….Not trying to pick a quarrel, but a comment that “the article is posted on Zero hedge and we know the biases of that site” strikes me as the sort of slight I see mostly on political blogs. Not that politics and economics are easily unhooked these days…

  191. T.J. Rand

    Gary-

    About the crisis every 75-80 years…if you are so inclined, there is a fascinating book called The Fourth Turning that espouses just that point of view. It was written in the late 90’s by a couple of Generational researchers whose premise is that we have a crisis in this country every 80 years or so based upon generational dynamics.

  192. Gary

    It takes about 80 years for the generation that caused the last credit bubble to expire. Then a new generation can make the same mistakes all over again.

    Human nature never changes πŸ™‚

  193. Brian

    That ship speed chart leaves too much to the imagination. Every carrier in the world, from boats to planes are examining what speed they operate at during all phases of operation. Southwest used to run full tilt all the time. Now they just roll along at whatever speed the company told them is best for that flight and they aren’t alone. Fuel is the biggest cost for every carrier, and it hasn’t been going down.

  194. Steven

    Gary,

    I thought you would appreciate this article saying rising oil prices will eventually tank the global economy.

    http://www.dailymarkets.com/economy/2010/12/18/did-high-oil-prices-help-cause-the-2008-financial-crisis-will-surging-oil-prices-soon-spark-another-financial-crisis/

    Also, do you think the positive correlation b/w DXY and gold/silver on Friday was a one-day fluke, bounce out of a daily low for gold or perhaps something more important. Last year around this time if I remember correctly they both went up in unison. I that perhaps what is happening? I understand this does not mean a parabolic rise (at least not in dollars) but something to watch perhaps.

  195. Gary

    The fundamentals in the energy market are somewhat impaired so yes they will follow the stock market back down.

    Gold just bounced off the 50 DMA and bounced very weakly.

    I wouldn’t plan on gold doing anything other than moving down into the intermediate low at this point. The risk is too great on the downside to try and catch a minor rally.

    Just be patient and sit still for a few weeks. We will get our opportunity soon enough.

  196. Natanarchist

    @maria….respectfully have to disagree about being prepared. I think many of the people who lived through katrina in New Orleans would also disagree.

    1) everyone, especially those in urban area’s should have a plan on how they plan to get out that area in case of any Black Swan event.

    2) I am quite sure you will want food so how do you plan on acquiring it? If we have a currency crisis, no one will want any amount of paper currencies you have or have made over the years, but you will want food won’t you? I will sell you a loaf of bread for that Gold coin or gold bar…I would take a silver coin too, which is why small denominations of silver are important for your preparedness kit.

    3) If I have food and a way to feed myself and family (which I do) you don’t think the desperation of others who are hungry might lead them to try and get some food? That is why I have a means of defense. Oh and my first responders are not the Police, but my wife and kids.

    4) having water, a source to acquire water and canned food or dehydrated food is also a prudent. Again, hunger breeds desperation Having seeds to grow your own food is also prudent. perhaps you don’t remember, but folks were growing gardens on their lots all through the 30’s. Victory gardens they were called.

    What folks who poo poo being prepared ( and this is traditionally a problem for western world) don’t seem to understand is we are not hiding away in our bunkers or such. We are prepared to take care of ourselves and our family’s in case of an emergency and go about leading our lives just like you, with the the single exception I noted above.

    The world will not end in any crisis. Many millions, perhaps a billion or so could die though, depending on what the crisis is. I don’t plan on being one of them. Don’t count on the government saving you…they will be trying to save themselves. Remember the boyscout motto…Be Prepared.

  197. DG

    Nat: I agree with you. In investing we look at risk and reward. What’s the risk of having food, water, some gold, propane stove, etc.? Heck, even an earthquake could make those things valuable (I live in CA after all!) I think the people who won’t prepare are in denial of the “it can’t happen here” variety. When you buy insurance you are not disappointed when your house doesn’t burn down. And you don’t consider the insurance premium a waste of money. I have no idea whether things are going to come truly unglued or not, but for the first time in my life I think the risk is great enough to be worth preparing for. If nothing happens, big deal.

  198. Natanarchist

    Thats my thinking DG..a little insurance just in case of ? I started to prepare my family back in ’02 and even my wife was kind of skeptical. It was only after watching the Katrina disaster that it sunk in with her. Watching people become completely helpless was not something we wanted to ever happen to us. I guess one could use an investing analogy…a little protection or hedge to protect what you have isn’t that hard.

  199. maria

    Sorry to not have responded sooner. First all I can say is, you must have a lot of younger traders on your forum who have not experienced severe and protracted bear markets. It’s easy for those who didn’t go through investing in the 1970’s to think “this time is different”. In the second world war the total debt of the US was higher than today and the country was on the verge of bankruptcy. I am sure investors thought the world was ending then too. Those of us who have gone through decades of investing have perhaps a different aspect on investing. Unfortunately your blog is not set up for a lengthy details. However your understanding of the use of options is a little askew. Options have a place every day, but you sound like you are trying to protect yourself from a market collapse by just buying options. No one who understands options does that. Investing is a lot more involved than that. Market collapses are rare events. Most bear markets grind slowly lower with periods of selling and periods of rallies. True collapses such as we saw in fall 2008 where big declines occur over a period of a few days, are rare events. There are excellent books out on options and those who believe that options only lose money do not understand their value. Your forum doesn’t allow enough characters for detailed descriptions but here is just one example – VISA. I have been in and out of VISA since it was first introduced in 2008. Here’s a quick example of the power of options. In May 2008 Visa was above 80.00. I bought 30 contracts January 2009 $75.00 put for 3.15. But I don’t want to through my money away, so I need to cover that cost. To do this I sell short term contracts. I sold 30 contracts Jun 75 put for .62 which expired worthless. I then sold 30 July 72.50 puts for .92 which expired worthless. I then sold 30 August 72.50 put for 1.75 which again expired worthless. I by now had earned 3.29 which covers the cost for the purchase of the Jan 2009 puts. So now my protection is free. I then sold 20 contracts of the Sep 2008 $70 puts for .85 cents and held 10 back as the stock appeared to be in trouble and I felt it could fall. As Sep options expiry approached the stock began to collapse and I bought back the 20 Sep 2008 70 puts for 2.00. By early Oct 2008 VISA fell below 50.00 and I sold my Jan 75 puts for $28.83 in the panic. So what did I make. I spent 3.15 to buy the puts, I then made 3.29 through shorting puts. I then lost (2.00 – .85) 1.15 X 20 contracts = buying back my Sep 70 puts and sold all 30 contracts for $86490.00. Total profit was 84610.00 on an initial investment of $9450.00. This year I have been in and out of VISA twice. A good site that has some interesting ideas is fullyinformed.com – the author of that site is the moderator of the yahoo forum I mentioned earlier. Sorry I cannot post more details but your blog is limiting.

  200. maria

    Just to conclude here are some books worth reading: For beginners to understand options : Getting Started in Options – by Michael Thomsett provides very good examples and a roadmap on how to get started and their flexibility. Other books to go more indepth and learn proper application of option trades include Options Trading For The Conservative Investor – by Michael Thomsett; The Power Curve: Smart Investing Using Dividends, Options, and the Magic of Compounding by Scott G. Kyle; Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks by W. Edward Olmstead; The Stock Option Income Generator: How To Make Steady Profits by Renting Your Stocks by Harvey C. Friedentag; The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets by Jeffrey Augen; Options Made Easy: Your Guide to Profitable Trading by Guy Cohen; and the Bible – Options as a Strategic Investment by Lawrence G. McMillan
    —All the books are excellent and I have them all and more. To learn, study strategies and paper trade until you find the strategies are perfected and consistently successful. Remember that buying options is just 1 option and very few option traders just buy options and hope things work out. Those who believe this do not understand how to use options effectively to protect positions and profit from them.

  201. maria

    One last comment about being prepared. As I said before, truly the problems ahead are huge and I certainly do not believe we should go “complacent into the night”. But I also believe it is important to be realistic. There are so many investing tools available today that were not available even a few years ago. To invest in today’s volatile market requires knowledge on the part of those who want to invest in order to remain profitable and afford protection. Options are one such tool and there are many others. That is what they are about. Being prepared.

  202. Steven

    TZ,

    One thing about the futures tax issues. Yes, the treatment of Section 1256 gains (regulated futures contracts) is correct. For a futures trading account you will receive a 1099-B that will show gains realized on the contracts during the year. This is different than a normal securities account where the only information reported on 1099-B is the proceeds from securities sold (most brokers also provide a schedule of realized gains but this is not sent to the IRS). You should also note that the 1099-B for regulated futures contracts the broker will also report gains and losses on open contracts as of the end of the year. These gains and losses are also realized (mark-to-market) so you don’t control the timing of recognizing gains and losses by holding contracts open.

    So there are some negatives if you don’t close out your position or may be forced to pay taxes on a position that is still open.

    Just a thought.

    Steven

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